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Fasten Your Seat Belts, We’re In for Some Chop: Taking Stock

After 16 sessions above its 200-day moving average, the S&P 500 reverted to an all-too familiar spot below the long-term support line. The index sat there for the better part of winter, and judging by the recent price action, spring isn’t coming for U.S. stocks any time soon.

I’m a bit skeptical about reading too much into technical indicators, but it’s hard to avoid the chart showing the last four times the index fell below its 200-day moving average, a pullback to some degree followed. You may remember a Taking Stock column from last week that addressed the importance of having the S&P trade above that 2,800 level. As the index failed to hold on to the psychological level, the selling pressure gained steam.

Growth Craze

All eyes will center on the all-important U.S. jobs report after China lowered its growth target, the Bank of Canada dialed back its expectations for tightening and the Organisation for Economic Co-operation and Development lowered its global outlook, all in one week. Futures are trading lower by 11 handles, and data showing a 20.7% drop in Chinese exports in February aren’t helping the sentiment. Traders are still likely assessing the effect of yesterday’s ECB growth outlook cuts and bracing for the economic data that can either push the stocks further down or help set up a turnaround given this week’s pullback. EPFR Global said U.S. stock funds saw a $5.5 billion outflow in the week through March 6.

The good news: ECB became the latest bank to capitulate to slowing demand, pushing back guidance on rate hikes and rolling out a series of long-term loans to help out lenders. News that policymakers will maintain ultra-low interest rates for longer than expected sent the dollar rallying. A stronger dollar and weaker growth outlook doesn’t bode well for U.S. megacaps that derive a chunk of their revenue abroad.

As Brown Brothers Harriman’s Win Thin put it, “You know things are going bad when the ECB goes full dove and risk still takes a big hit.” Adding to a chorus of analysts expressing growth concern, Wells Fargo Investment Institute cut its guidance on the S&P 500 to neutral from favorable and advised a modest reallocation from U.S. large-cap stocks to cash.

Financials Sour

Bank stocks faded this week as investors wondered whether their outperformance so far this year is worth it. The KBW bank Index is still up a healthy 13 percent versus the S&P 500’s 9.7 percent gain, even with growth worries looming. One sign buyers may be tired of the sector: A once-longed-for spate of good news on the regulation front from the Trump administration, this time including easier stress test instructions from the Fed on Wednesday, wasn’t enough to tempt stock buyers.

Now, Nomura says bank shares don’t deserve their premium versus credit cards. Bank stocks have commanded higher valuations since 2016, as rates began to rise and their greater asset sensitivity became more valuable, analyst Bill Carcache says. That’s different today, as we’re near the end of the rate-hike cycle, because asset sensitivity is worth less, while consumer credit is still healthy.

Two Days, -20% in Market Cap

Going by the stock exchanges’ short interest data, Barnes & Noble was the second most-shorted stock among the Russell 3000 firms that reported earnings on Thursday (behind Camping World, more on that below). Bears got it right: shares plummeted 13% after the company slashed its outlook for this year, after warning in January it had a bad holiday season. The stock just shed a fifth of its value in two sessions in the biggest two-day slump since 2015. Recall the book retailer said in October it’s been weighing acquisition interest from several parties, including its second-largest holder and founder Leonard Riggio.

Kroger plunged 10%, the most in the S&P, after grocer’s holiday-period performance and full-year expectations missed estimates. Cannabis name Cronos Group was all over the place, first plunging as much as 3.3% after a downgrade to neutral from Eight Capital, then trading 1.6% higher before finally settling lower for the day. Xerox fell 2% as it announced plans to restructure its business to make the printer maker a wholly owned unit of a new holding company. Burlington fell 12%, the most ever, after a sales miss.

Sectors in Focus Today

Watch biotech stocks after Trevena plunged 12% post-market after saying the FDA rescinded its breakthrough designation on the pain management drug oliceridine after data wasn’t sufficient to support the designation

Recreational vehicles stocks can move after Camping World tumbled as much as 11% post-market after its fourth quarter adjusted Ebitda missed the lowest estimate

Lithium and electric vehicle makers as the carmaker’s new China factory is a big catalyst for this year, according to my colleague Esha Dey, even though it would take quite some time for it to begin production. And after Morgan Stanley’s Adam Jonas voiced some pretty strong skepticism Tesla will ever make money in China. Shares are up a little in pre-market trading.

On Tap for Next Week

As the earnings season dials down, stock correlations tend to pick up, pushing investors to focus on sector-wide news as opposed to company-specific events. But chances are it won’t happen if a selloff in U.S. stocks continues and investors start hitting the sell button across the board.

On Monday we’ll finally get the January retail sales report, which was delayed for weeks by the government shutdown. Economists expect a 0.1 percent rebound after a drop in December.

I will keep a close eye on European assets on Tuesday as the U.K. holds the third Brexit vote (read our Bloomberg Businessweek’s cover story about Theresa May surviving the second Brexit vote defeat). Over in Washington, the Trump administration is expected to release the budget for fiscal 2020. The House Financial Services committee will hold a hearing titled “Holding Megabanks Accountable: An Examination of Wells Fargo’s Pattern of Consumer Abuses” on the same day.

Then, there’s General Electric. The firm will hold a guidance outlook call on March 14, which, according to JPMorgan derivatives strategists led by Shawn Quigg will likely be a high-impact event for the stock. After rising for 11 of the past 12 weeks, GE doesn’t look good this week: it’s on track for an 8% slump after CEO Larry Culp warned of further cash problems.

Notes From the Sell Side

Jefferies is harshing the buzz of the cannabis rally – a group that’s up more than 40% YTD, going by the ETFMG Alternative Harvest ETF – starting coverage on trading favorite Tilray with an underperform rating. “We appreciate it is well placed in medical but future value here will be driven by IP,” and there is “little visibility” on this score in the near term. Analyst Owen Bennett added that the company had an “arguably inferior positioning in parts of its business,” and that it was a “struggle to justify the current valuation.” TLRY shares are basically flat on the year, but it remains up more than 200 percent since the end of July – as well as down almost 70 percent from its euphoric September peak.

Exxon Mobil executives were praised for their candor in Thursday’s Analyst Day meeting, but Cowen didn’t like what it heard, downgrading the energy major to market perform. In particular, analyst Jason Gabelman cited the company’s hydrocarbon investment plans. This “counter-cyclical investment decision may look prescient in future years, but we do not believe the investor community is willing to place that same bet today,” he wrote. “Investors are likely more willing to pay for excess FCF today than count on future FCF.”

Alaska Air was cut to in-line from outperform at Imperial Capital, which also took an ax to its price target, chopping it by nearly a third to $61, from $90. The firm is skeptical that the airline company can achieve its margin target by 2020, in part because of “extraordinarily low” transcontinental fares in the weaker off-peak periods. Analyst Michael Derchin is now forecasting a first-quarter loss for ALK, whereas he previously estimated a modest profit. Imperial also cited “significant competition in Hawaii that could spread to key California markets” – Southwest recently expanded its Hawaii routes, prompting a similar downgrade of Hawaiian Holdings from Deutsche Bank earlier this week – along with “tougher comparisons” starting in the second half of the year and “higher fuel and non-fuel costs.”

Tick-By-Tick Guide to Today’s Actionable Events

One World Trade Center will be lit purple for International Women’s Day, with Security Traders Association of New York, Women-in-Finance